Biden administration unveils long-awaited process to reinstate China product exclusions

Introduction
Reinstatement of section 301 exclusions
Comment process for reinstatement
Scope of products eligible for reinstatement
First steps towards realigning the US-China trade relationship
Comment

Introduction

On 5 October 2021, the United States Trade Representative (USTR) announced the Biden administration's highly anticipated China trade policy, including a comment request process that will be used to determine whether section 301 product exclusions should be reinstated for certain China-origin products that are currently subject to additional ad valorem tariff rates between 7.5% and 25%. A link to the federal register notice can be found here.

In brief, the following points can be noted:

• The USTR request for comment only covers 549 expired product exclusions (a list of these products can be found here).
• Comments must be filed by 1 December 2021. Based on the submitted comments, the USTR will determine which of the 549 expired product exclusions will be reinstated and such reinstatement would apply retroactively to 12 October 2021.
• Importers of these products (which include certain prepared meal products, steel fasteners, hand tools, motors and transmission parts, backpacks and duffle bags, parts for industrial machinery, and various production materials ranging from chemicals and minerals to plastics, textiles and base metals) should consider filing comments to reinstate the section 301 exclusion. There may also be an opportunity to obtain refunds on duties paid on products granted exclusions.
• The potential reinstatement of such previously granted product exclusions is part of a larger restructuring of the United States' bilateral trade relationship with China. Initial priorities for the United States' recoupling with China will include enforcement of commitments in the phase one agreement and the possibility of additional section 301 investigations to combat certain non-market Chinese trade practices.

Reinstatement of section 301 exclusions

Pursuant to findings based on section 301 of the Trade Act of 1974 (19 US Code section 2411), the USTR imposed additional duties on four tranches of products between 20 June 2018 and 22 January 2020. The tranches are known as "List 1", "List 2", "List 3", "List 4A" and "List 4B" and cover approximately $550 billion worth of yearly imports from China. The products on those lists are subject to the following rules.

• Products on Lists 1-3 are currently subject to an additional 25% tariff.
• Products on List 4A are currently subject to an additional 7.5% tariff.
• Products under List 4B are not currently subject to any additional tariff.

When the section 301 tariffs were implemented, the USTR established a process to exclude certain products on List 1 to List 4A from their corresponding section 301 tariff. Aside from the product exclusions that were granted in relation to the covid-19 pandemic, the final set of product exclusions extended by the USTR covered 549 product exclusions and expired between 31 December 2020 and 18 April 2021. Since the expiration of these product exclusions, the China-origin products within these 549 product categories have been subject to an additional 7.5 to 25% tariff upon import.

Comment process for reinstatement

On 5 October 2021, the USTR requested comments to evaluate whether the 549 product exclusions should be reinstated. This comment submission window is between 12 October 2021 and 1 December 2021, and all comments must be submitted through the USTR Public Docket Portal. The comments can be made by a party seeking to support or oppose the reinstatement of one of the 549 product exclusions, whether or not such party previously submitted an exclusion request.

Based on the submitted comments, the USTR will evaluate whether the 549 product exclusions should be reinstated on a case-by-case basis through an assessment of the following factors:

• whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries;
• any changes in the global supply chain since September 2018 with respect to the particular product or any other relevant industry developments;
• the efforts, if any, the importers or US purchasers have undertaken since September 2018 to source the product from the United States or third countries;
• domestic capacity for producing the product in the United States;
• whether the imposition of additional duties on the particular product would cause severe economic harm to the requester or other US interests; and
• whether the particular product is strategically important or related to "Made in China 2025" or other Chinese industrial programmes.

Any reinstatement granted by the USTR would be retroactive to 12 October 2021.

Scope of products eligible for reinstatement

The possible reinstatement of section 301 product exclusions only covers the 549 product exclusions that expired between 31 December 2020 and 18 April 2021. Determining whether an imported product is eligible for this reinstatement requires matching the product's characteristics and harmonised tariff schedule (HTS) classification to the exclusion product description on the USTR's list of 549 product exclusions. In summary, these product exclusions eligible for consideration consist of the following.

The commodities within these product categories include:

• food products, personal care products, chemicals and minerals, wood and paper products, textile materials, stone and ceramic products, glass products, optical and medical instruments, and measuring and checking apparatuses;
• base metal products (eg, steel fasteners and hand tools, as well as articles of iron, steel, nickel and aluminium);
• vehicles and their parts (eg, work trucks, motorcycles and automotive parts, such as motors and transmission components);
• machines and appliances (eg, parts for printing machines, cutting machines, drilling machines, sewing machines, vacuums, heaters, air conditioners and refrigerators); and
• consumer products (eg, backpacks, duffel bags, leather accessories, bicycles, recreational sporting goods and furniture).

First steps towards realigning US-China trade relationship

The reinstatement of previously granted exclusions is part of a larger restructuring of the United States' bilateral trade relationship with China. Following a months-long internal policy review, United States Trade Representative Katherine Tai outlined the Biden administration's US-China trade policy during remarks at the Center for Strategic and International Studies on 4 October 2021.

Though the United States will maintain a worker-centred trade policy, focused primarily on domestic investments to enhance American competitiveness at home, it will also pursue four initial steps to realign the US-China trade relationship:

• The United States will discuss with China its performance under the phase one agreement negotiated by the Trump administration. The USTR will continue to engage with China on implementing and maintaining the phase one agreement, including purchasing commitments benefiting American industries that are set to expire at the end of the year. However, USTR Tai emphasised that the phase one agreement is only a "starting point" for resuming and resetting bilateral contact between the United States and China, and the USTR will move beyond the initial agreement in determining how best to navigate the relationship with China in the near and long term. USTR Tai noted that "you have to start somewhere if you want to get somewhere else" but clarified that further discussions with China will be dictated by their engagement on phase one.
• The United States will begin a "targeted tariff exclusion process" to serve the economic interests of US businesses, especially small and medium-sized businesses. As detailed above, the USTR unveiled a narrow process for requesting reinstatement of 549 previously extended exclusions from the additional section 301 tariffs. It is unclear whether an additional, broader process for requesting new exclusions is forthcoming. USTR Tai noted that the USTR will consider the potential for additional exclusion processes "as warranted" and will continue to prioritise the availability of domestic or third-country alternatives in granting exclusions.
• The United States will use the full range of tools available and develop new tools as needed to address larger trade policy concerns with China. Though helpful as a starting point for engagement with China, the phase one agreement failed to "meaningfully address" certain fundamental concerns, including China's state-centred and non-market trade practices. Throughout her speech, USTR Tai emphasised that section 301 is "a very, very important" trade enforcement tool to defend the interests of the American economy. There is no indication that the Biden administration intends to remove the additional section 301 tariffs. USTR Tai did not foreclose the possibility for further tariffs pursuant to section 301 and, in fact, referenced the possibility of a new investigation, which may target Chinese subsidies.
• The United States will continue to work with allies to shape the rules for fair trade and facilitate a "race to the top" for market economies and democracies. USTR Tai highlighted the importance of working with "like-minded partners" to build fair and open markets enabling healthy competition, which she said was the "core" of the US trade strategy. The goal is to achieve shared prosperity for American businesses, as well as US allies and the larger global economy.

Importantly, USTR Tai's remarks highlighted that the United States would continue to engage with China, ruling out the "decoupling" of US-China supply chains as a "realistic outcome" and a Biden administration priority. Instead, the initial US policy towards China will focus on a "re-coupling" of the trade relationship, with the United States engaging from a position of strength rather than dependency. Though the Biden administration intends to reengage with China, USTR Tai did not provide a timeline for bilateral discussions.

Comment

This comment process may result in significant potential duty savings opportunities on a wide range of products from China. Importers are urged to review their imports from China and if any of their imports are covered by the 549 product exclusions, consider filing written comments. Importers may also have the opportunity to recover duties paid in connection with exclusions ultimately granted.

For further information on this topic please contact David R Hamill, Angela Santos, Antonio J Rivera or Leah Scarpelli at Arent Fox LLP by telephone (+1 202 857 6000) or email ([email protected], [email protected], [email protected] or l[email protected]). The Arent Fox LLP website can be accessed at www.arentfox.com.